Islamic Development Bank - IDB Microfinance Experience

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  • 1. IsDBMicrofinance Experience

2. ComprehensiveHuman Development Nafs (Self) Maal (Wealth ) Aqal (Knowledge) Nasl (Posterity) THE ISLAMIC VISION OF DEVELOPMENT Maqasid Al-Shariah Deen (Religion) Islamic Financial Services Industry Institutional Management of Wealth Security & Basic Needs Property Honour Knowledge Higher Education Science & Technology Education Capacity Building Nutrition & health Fiduciary Duty Sports Environmental preservation Means to an end Research & Development Moral Education Transparency Capacity Building Governance Protection Justice Values 3.

  • More than 300 Islamic Financial Institutions
  • In over 65 countries
  • Managing assets of approximately US$ 1.0 trillion in Shariah compatible manner
  • More than 15% annual growth
  • Worldwide recognition

Significant resources potentialforIslamic Microfinance Industry 4. Need for an Islamic Microfinance Development Strategy

  • Over 3 billion people living on less than two dollars a day
  • Over 2/3 of world refugees are Muslims
  • Lowest Five among IDB member countries account for over half a billion (528 million) of the worlds poor (with incomes below $2 a day)
  • Lowest Ten account for over 600 million of the worlds poor
  • Among 500 million micro-entrepreneurs: currently Less than10%, i.e. 50 million, can access credit
  • The informal sector represents over 60% of the active population of most developing countries
  • Over 7,000 Micro-Finance Institutions (MFIs) have difficultiesto access the capital markets


  • Poverty alleviation thru provision of suitable and sustainable access to financing.
  • Capacity building
  • Nurturing entrepreneurship support at grass roots level
  • Introduction of Islamic financing modes

IDBs Finance Current Strategy 6. Main Features of IDBsCurrent FinanceScheme

    • Country eligibility: Low Income and LDMCs
    • Mode of Financing:Loan Service fee 0.75 to 2.5%
    • Tenor:25 to 30 years with 7 t0 10 grace period
    • project investment:US$ 5,000 per project
    • Maturity:3-5 years
    • Beneficiaries contribution:10-20% of project cost

7. IDB Government Central Bank US$ account in commercial local bank Revolving fund + 65% of markup 35% of markup (operational cost of NGOs ) Financial Intermediary/NGO Micro-entrepreneurs (in local currency) External auditors Key: Physical transfer money Reporting to/instructing LDMC loan at 0.75% for 30 yrs incl 10 yrs grace US$ at max. 2.5% pa 24-30% pa (local currency) 20-22% pa (local currency) Max 5 yrs incl 2 yrs grace Repayment loan 8. IDB Finance Operations IDB Finance ACHIEVEMENTS AND IMPACT 9. SKILLS POVERTY LINE The poor requestto start his assistance with a:

    • Promotional Social Safety Interventions Package :
    • Literacy & Awareness, Counseling
    • Vocational training & Skills upgrading,, career guidance, Management,
    • Entrepreneurship & Business linkages promotion (Subcontracting, Franchising and Clusters and collaborative production networks),
    • Community Development Basic skills,
    • Other Poverty alleviation interventions such as Grants to education, house extension

Balance ofThe Poors Professional skills 10. The poor request mobilizing Package of Business DevelopmentServices Counseling, Training Experiences Networking access to markets SKILLS POVERTY LINE Counseling, Training Experiences Networking access to markets Balance ofThe Poors Professional skills 11. The poor request mobilizing Package of Business DevelopmentServices Counseling, Training Experiences Networking access to markets Business IncubatorsServices SKILLS POVERTY LINE Balance ofThe Poors Professional skills 12. The poor request mobilizing Package of Business DevelopmentServices Counseling, Training Experiences Networking access to markets Business IncubatorsServices Upgrading services for BDSIs and MFIs SKILLS POVERTY LINE Balance ofThe Poors Professional skills 13. The poor request mobilizing Package of Business DevelopmentServices Counseling, Training Experiences Networking access to markets Business IncubatorsServices Upgrading services for BDSIs and MFIs Designing innovative BDS & appropriate technologiesAdapted to the Poor needs SKILLS POVERTY LINE Balance ofThe Poors Professional skills 14. The poor request mobilizing Package of appropriate Financial Services ECONOMIC POVERTY LINE VISION / STRATEGY / APPROACH Continuing on Skills Upgrading assistanceBalance ofPoor Self-Sufficiency 15. The poor request mobilizing Package of appropriate Financial Services Capital loans Micro-Grant Consumer loans Micro-Savings Micro-Housing loans Education loansMicro-Pensions Micro-Insurance VISION / STRATEGY / APPROACH ECONOMIC POVERTY LINE Balance ofPoor Self-Sufficiency 16. Role of Micro-grants inIDB Microfinance Operations

  • To
  • Rebuild livelihoods
  • Replace lost assets
  • Overcome social isolation
  • Gain productive skills
  • Graduate to economic self-sufficiency
  • Helps groups: high-risk
  • In immediate Conflicts and Post conflicts environments
  • In severely disadvantaged rural areas
  • In intervention situation for the chronically destitute


  • Microfinance Projects Design and implementation mechanism
  • IDB may adapt Ready-to-Use Microfinance Frame work Package approach adopted CGAP consortium of donors.
  • More IDB involvement in early phase of Projects/Programs formulation
  • Investmentin long-term programs in support of a few policy objectives rather than in short-term stand-alone projects

FROM IDBFINANCEEXPERIENCE 18. IFS DEVELOPMENT PROGRAM : THE WAY FORWARD Awqaf Sadaqa Zakat IDB Pov. All. Fund Corporate Donations Others Comprehensive Human Development Community A Community B Community C Individual2 Individual1 Individual3 Individual1 Individual1 Individual2 Individual2 Individual3 Individual3 M I c r o f I n a n c e IFS Development Fund Other IFS 19. Understanding thePoorRights & Needs Variety of Products

  • Housing loans
  • Education loans
  • Life cycle products

Flexible financing Products

  • Small initial loan sizes
  • Larger loans over time
  • Longer terms

No Collateral Special Services & treatment

  • Respect, connection with pertinent stakeholders
  • Rapid response, andaccess to services
  • Group guarantee

Promotional Social Safety Net Interventions

  • Information, Counseling
  • Training,skills upgrading
  • Marketing Assistance
  • Technology devmt, transfer
  • Business linkages

Zakat applicable Waqf applicable Zakat &Waqf applic ZA WA WA ZWA WA ZA ZWA ZWA ZWA Lessons to be learnt from IDB experience Asset Building, Risk Mitigating Products

  • Voluntary savings
  • Health and life insurance


  • Making Economic Policies & Growth Pro-poor
  • Re-distributive policies (targeting the poor)
  • Providing Social Safety Nets to poor & marginalized groups
  • Addressing Social barriers & issues facing women in economic development

Lessons to be learnt from IDB experience 21.

  • Making Economic Policies & Growth Pro-poor
  • Targeted programmes and projects to enable the poor to benefit from economic growth through :
  • Labour intensive projects,
  • Telecommunications, electricity, roads, infrastructure,
  • Food security projects, post-conflict/reconstruction projects,
  • Environment sustainability and renewable energy, micro-credit, cross-cutting projects, etc.

Continued Lessons to be learnt from IDB experience 22. Incomeof USD10 million Waqf @ 5% return, would provideaverage loans of $100 to5000Poor Zakat & Waqf Microfinance efficiency Appropriate risk management Mechanism should be established to protect the Waqf from decay . Zakat, Takaful Funds may be the alternative,. 90,000 benefeciaries would be covered if90%of the Waqf used in microfinancing. 23.

  • Promote Islamic Microfinance Houses (IMH)
  • Objectives:to complement the Comprehensive Human Development model by providing access to integrated Islamic Microfinance financial services to the poor in our member countries
  • The Microfinance Houses Development Programme would initially entail a pilot project in 5 member countries for creating and/or strengthening existing Microfinance institutions.

Continued Lessons to be learnt from IDB experience 24.

  • The IMH would also undertake other interventions which would strengthen the livelihood of the poor, such as;
    • Investments in public infrastructure, including roads, communications and education which provide a foundation for self-employment activities.
    • Community-level investments in commercial or productive infrastructure (such as market centers or small-scale irrigation infrastructure) to facilitate business activity.

Continued Lessons to be learnt from IDB experience 25. Lessons to be learnt from IDB experience 26.

  • Rural (esp. agricultural) finance
  • Services like microinsurance, leasing, and remittances
  • Social performance measurement
  • Defining the lower limits of viable microfinance and
  • Employing other interventions, including grants
  • Replicable strategies for unlocking country-level capital markets for microfinance
  • Role of donors relative to international equity and loan funds
  • Cost-effective and sustainable ways to combine non-financial development services with financial services



28. Model of an Ideal Islamic Bank

  • A Universal Bank covering
    • Commercial Banking
    • Investment Banking
    • Advisory Services
    • Custodial Services
    • Asset Management
    • Zakat Management
    • Awqaf Development
    • Microfinance
  • This bank should be a vehicle for equitable distribution of wealth.

29. IDBs Role in Islamic Financial Sector Development

  • Recent Initiatives
  • Ten-Year Framework forDeveloping the IFSI, Joint Initiative
  • Establishment of a Policy Dialogue Working Group
  • IFSI Development Technical support proposal
  • IFSI Development Program

Previous Initiatives Equity investments in IFIsEstablishment of eight infrastructure institutionsResearch, training and technical assistanceDevelopment of financial products/funds (UIF, IBP) and Awqaf sector 30.

  • Provide Supportive Legal, regulatory and tax framework
  • Ensure Macroeconomic Stability
  • Keep Inflation in Check
  • Curb Speculative Forces in Financial Markets
  • Integrate Awqaf and Zakah in National Policy
  • Support Civil Society Efforts

Macro Perspective: Policy & Regulatory Framework 31.

  • Should there be Prudential Regulation for Non-deposit-taking MFIs?
  • Should Non-registered Entities be Prohibited from Lending?
  • How should Islamic MF be Separated from Conventional MF in a Dual System?

Macro Perspective: Policy & Regulatory Framework Resolves the Unresolved Issues in Banking Sector Regulation and Supervision that AffectMicrofinance 32.

  • Basic financial infrastructure, Range of services required to reduce transaction costs, increase outreach, build skills, and foster transparency
  • Payment Systems:Only large Islamic FIs have access to electronic payment systems
  • 3. MFIs working for the poor may work through the larger Islamic FIs by forging alliances with them

Meso Perspectives: Infrastructure, Networks, Technical Service Providers

    • Transparency and Information: High-quality auditors and rating agencies, credit bureaus, reliable information software - scarcely available to Islamic MFIs
    • Existing MF-specific Agencies expand scope to include Islamic MF; or Existing Agencies for Mainstream IFIs to absorb MF services
    • Proactive role of Donors in Development of Islamic MF Rating


  • Diverse Organizational Structures:
  • Informal MF Providers,
  • Member-Based Organizations,
  • Non-Government Organizations,
  • Formal Financial Institutions,
  • Commercial Banks

Micro Perspectives: Islamic Microfinance Providers Diversity should be given due recognition in regulation Need to Develop an Integrated Structure 34.

  • Shariah Compliance
    • Shariah Boards
    • Fiqhi Issues
    • Divergent Perceptions
    • Confidence of Users
  • Collective Resolution of Shariah Issues

Micro Perspectives: Islamic Microfinance Providers 35. RECOMMENDATIONS Cooperatives-NGOs Efficient Management of Community Assets, Combine Social and Economic Agenda Effectively,Islamic Financial Institutions Recognize MF with Distinct Risk-Returns, Undertake Direct and Indirect Financing, Linkage with Grass-root NGOs, Facilitate Capital Market Participation of MFIs Awqaf & Zakah Funds Preserve and Develop Community Assets, Undertake TA, Transform the Destitute into Bankable ClientsGovernment Agencies Create Supportive Policy and Regulatory Environment for IMFIs Concerted Efforts by ALL Stakeholders to Make Finance Work in Muslim Communities through Islamic Finance 36. THANK YOU